Circular No.20 of 2023

In accordance with Section 194-O of the Income Tax Act, tax deduction at source (TDS) is mandated when an e-commerce operator (ECO) facilitates the sale of goods or provision of services through its digital platform. This provision applies to both buyers and sellers engaged in such transactions.

Sub-section (4) of Section 194-O of the Income Tax Act, which grants the Board the authority, with the approval of the Central Government, to issue guidelines aimed at addressing challenges or difficulties arising in the application of the section. Earlier, guidelines on Section 194-O were provided through Circular No. 17 of 2020 dated 29th September 2020 and Circular No. 20 of 2021 dated 25th November 2021. However, due to representations and the need for further clarifications, the Board exercises its power under Sub-section (4) of Section 194-O to issue additional guidelines. These guidelines are intended to offer more detailed instructions or explanations to facilitate the proper implementation and understanding of the provisions outlined in Section 194-O of the Income Tax Act.

1. Who should deduct tax at source where there are multiple e-commerce operators (ECO) involved in a transaction?

Situation 1: Where multiple ECOS are involved in a single transaction of sale of goods or provision of services through ECO platform or network and where the seller-side ECO is not the actual seller of the goods or services

In the first scenario, where multiple ECOs are involved in a single transaction, and the seller-side ECO is not the actual seller of goods or services, the compliance responsibility under Section 194-O lies with the seller-side ECO. This ECO, responsible for providing an interface to the seller, is required to deduct TDS at a rate of 1% on the gross amount of the sale. The deduction occurs either at the time of crediting the seller`s account or at the time of payment or deemed payment, whichever comes first. Following the deduction, the seller-side ECO is obligated to file the necessary TDS return using Form 26Q and issue a certificate (Form 16A) to the seller.

Situation 2: Where multiple ECOS are involved in a single transaction of sale of goods or provision of services through ECO platform or network and where the seller-side ECO is the actual seller of the goods or services:

In the second scenario, where the seller-side ECO is the actual seller of goods or services and interacts directly with another ECO (ECO-2), the compliance responsibility shifts to ECO-2. In this situation, ECO-2, responsible for making the payment or deemed payment to the seller, is required to deduct 1% TDS on the gross amount of the sale. Similar to the first scenario, the deduction is made either at the time of crediting the seller`s account or at the time of payment or deemed payment. ECO-2 then files the necessary TDS return (Form 26Q) and issues a certificate (Form 16A) to the seller. In both scenarios, the tax deduction is applied to the gross amount of the sale, ensuring that the entity making the actual payment is responsible for fulfilling the TDS obligations.

2. E-commerce operators may be levying convenience fees or charging commission for each transaction and seller might levy logistics & delivery fees for the transaction. Payments may also be made to the platform or network (e.g. ONDC) provider for facilitating the transaction. Would these form part of "gross amount" for the purposes of TDS under section 194-0 of the Act?

In the context of Section 194-O of the Income Tax Act, various fees and charges associated with e-commerce transactions, such as convenience fees, commissions, logistics, and delivery fees, are considered part of the "gross amount" for the purpose of tax deduction at source (TDS). Additionally, payments made to platform or network providers, like ONDC, for facilitating transactions are included in the gross amount if linked to the payment for the transaction. However, lump-sum payments not tied to a specific transaction need not be incorporated into the gross amount.

For instance, let`s consider an example where a buyer purchases goods worth Rs. 100 from a seller and opts for home delivery. The seller charges the buyer an additional Rs. 5 as packing fees, Rs. 10 as shipping fees, and Rs. 3 as a convenience charge, which recoups the fees charged by the seller-side ECO (including Rs. 1 by the buyer-side ECO and Rs. 2 by the seller-side ECO). In this case, the seller issues an invoice for Rs. 118 (Rs. 100 + Rs. 5 + Rs. 10 + Rs. 2 + Rs. 1) to the buyer. The shipping fees, packaging fees, and convenience fees are separately charged to the buyer to provide services related to the main supply.

TDS is then to be deducted under sub-section (1) of Section 194-O on the gross amount of Rs. 118 at the time of payment (including deemed payment) or credit by the seller-side ECO. The seller-side ECO would file the requisite TDS return in Form 26Q and issue a certificate to the seller under Form 16A.

Moreover, the example underscores the exclusionary principle stated in sub-section (3) of Section 194-O. A transaction on which TDS has been deducted under sub-section (1) of Section 194-O is not liable to TDS under any other provision of Chapter XVII-B. This means that the fees charged by both the buyer-side ECO (Rs. 1) and the seller-side ECO (Rs. 2) for their respective services are not subject to further TDS under any other provision i.e., in this case is section 194H.

3. How will GST, various state levies and taxes other than GST such as VAT/ Sales tax/ Excise duty / CST be treated when calculating gross amount of sales of goods or provision of services as per the provisions of section 194-0 of the Act?

In the context of Section 194-O of the Income Tax Act, the treatment of GST, various state levies, and taxes other than GST (such as VAT/Sales tax/Excise duty/CST) when calculating the gross amount of sales of goods or provision of services is clarified. The guidance provided aligns with the treatment specified for TDS under Section 194Q for the purchase of goods.

The clarification, as outlined in Circular No. 13 of 2021, explains that when tax is deducted at the time of crediting the amount in the seller`s account, and the GST component is separately indicated in the invoice, tax should be deducted under Section 194Q on the amount credited without including the GST. This is applicable when the deduction is made on a credit basis. However, if the deduction is on a payment basis (prior to crediting), the tax would be deducted on the entire amount, as it is not feasible to distinguish the payment with the GST component for future invoicing.

Similar clarification is extended to state levies and taxes other than GST in Circular No. 20 of 2021. If the component of VAT/Excise duty/Sales tax/CST is indicated separately in the invoice, tax under Section 194Q should be deducted on the amount credited without including these state levies and taxes. Again, if the deduction is made on a payment basis before crediting, it would be on the entire amount, as it is challenging to identify the payment with state levies and taxes for future invoicing.

Applying this to Section 194-O, when tax is deducted at the time of crediting the amount to the seller, and the components of GST and various state levies and taxes are separately indicated, the deduction should be on the amount credited without including these components. However, if the deduction is on a payment basis (prior to crediting), it would be on the whole amount, as it is not feasible to distinguish the payment with the GST and state levies and taxes components for future invoicing. This clarification ensures consistency in the treatment of deductions under both Section 194-O and Section 194Q regarding GST, state levies, and other taxes.

4. How will adjustment for purchase-returns take place?

The clarification provided in paragraph 4.3.3 of Circular No. 13 of 2021 regarding purchase returns under Section 194-Q of the Act is relevant to the understanding of the treatment of such scenarios in Section 194-O as well.

For purchases under Section 194-Q, it`s clarified that tax must have been deducted before the occurrence of the purchase return. In such a case, the deducted tax may be adjusted against the next purchase with the same seller. No adjustment is required if the purchase return is replaced, indicating the completion of the transaction on which tax was deducted.

Applying a similar rationale to Section 194-O, where tax is required to be deducted at the time of payment or credit, whichever is earlier, it implies that before a purchase return happens, tax must have already been deducted on that purchase under Section 194-O. If tax has been deducted, and against this purchase return, a refund is issued, the deducted tax, if any, can be adjusted against the next transaction with the same deductee in the same financial year. This aligns with the principles mentioned in Circular No. 13 of 2021.

It`s important to note that no adjustment is necessary if the purchase return is replaced by goods, as this signifies the completion of the transaction on which tax was deducted under Section 194-O. This ensures consistency in the treatment of purchase returns and adjustments in both Section 194-Q and Section 194-O scenarios.

5. How will discounts given by seller as an e-commerce participant or by any of the multiple e-commerce operators be treated while calculating "gross amount"?

The treatment of discounts given by the seller as an e-commerce participant or by any of the multiple e-commerce operators in calculating the "gross amount" under Section 194-O is outlined as follows:

a) Seller Discount:

In situations where the discount is provided by the seller, the seller would reduce the price of the products sold or services provided. For example, if the label-price of a product is Rs 100 and the seller offers a discount of Rs 10, the amount receivable from the buyer would be Rs 90. Consequently, the seller will invoice the buyer for Rs 90, and the TDS will be calculated on this reduced amount of Rs 90.

b) Buyer ECO or Seller ECO Discount:

In cases where the discount is given by the buyer ECO or seller ECO, the seller usually receives the full consideration for the product. However, part of it is received from the buyer, and the balance is discharged to the seller by the buyer ECO or seller ECO, as the case may be.

As an example of a discount given by the buyer ECO, if the price quoted by the seller is Rs 100 and the buyer ECO offers a discount of Rs 10, Rs 90 (i.e., 100 - 10) will be collected from the buyer and remitted to the seller. The buyer ECO will pay the remaining Rs 10 to the seller via the seller ECO. The invoice on the buyer will be raised for the full amount of Rs 100, and tax will be deducted by the seller-side ECO on the gross amount of sales, which is Rs 100.

This distinction recognizes that discounts offered by the seller directly lead to a reduction in the invoice amount, while discounts provided by the buyer ECO or seller ECO are factored into the overall consideration for the transaction, and tax is deducted on the gross amount before applying the discount.